When would a stockholder be willing to purchase a class of common stock that did not have full shareholders’ rights?
Not all shareholders’ rights are of equal value to all shareholders. Some shareholders value one or more of the rights of ownership so highly that they are willing to give up other shareholder rights to secure the ones they value most.
- For example, when venture capitalists invest in a startup business, the company’s managers often get stock with control but limited income (“founder’s shares”) while the venture capitalists get shares with income but limited control.
Also, some shareholders are prohibited by law or regulation from owning one or more of the traditional shareholder rights.
- For example, a charity or foundation which owns a substantial amount of the stock of any one company will attract the scrutiny of the IRS which will wonder whether it was set up to evade taxes while maintaining control of the company.
Such a charity or foundation might prefer stock with all the income and residual value rights but with limited or no voting power to avoid threatening its tax-exempt status.